Dot Coms

In the past decade, many companies assumed that publishing ("let's get a bunch of users and make a ton of money off ads!") was the only viable business model online since only a few companies (amazon, ebay) seemed to be able to actually sell stuff to people. But while some were making a killing on ads, most found it unsustainable - either their audience wasn't large enough, or it was too fragmented to sell to publishers.

Fast forward to a few years ago, and a few interesting things happened to challenge that assumption:

iTunes is wildly successful at distributing paid digital content

Facebook opens its platform, and some game developers figure out how to make more than half a billion dollars of revenue

the Fremium business model is successfully adopted by several services

...thereby showing that

some (many?) people are willing to pay for things online

it is possible to create a sustainable online business from paying customers

Today, entrepreneurs like my friend Max need to decide up-front whether to create a paid experience or to go with an advertiser supported model. This affects the fundamental design of their service, and may be a difficult decision to change down the road.

Social game developers, meanwhile, have hit on a formula that lets them abstract their monetization strategy from the experience they provide. Let me explain.

Abstraction

Remember (from my earlier post on Social Games and Virtual Currency) that developers price their experience in virtual currency, and provide multiple ways for users to earn that currency including playing the game, completing an offer, purchasing the currency, or paying for some sort of subscription.

That should sound super familiar to you from Part I which talks about the monetization funnel. Here's that funnel again (click to enlarge):

You can see that all of those methods of monetization live on the funnel too. And, just as you'd expect, the further down that funnel you go, the more virtual currency you get - because that's where the developer makes the most money.

For example, when you're just playing the game to get more points, the developer isn't really making much money off you. At most they may display some ads on the side that you happen to click - this was more popular a few years ago in the early days of social games. And so, earning currency by playing the game usually takes a long time.

On the other end of the spectrum, subscriptions is the most lucrative type of monetization because many people have too much inertia to cancel a subscription so even if they don't use your service, they continue paying you. That's why developers will offer you all sorts of extra benefits if you sign up for a subscription service.

What's so cool about this? Aren't game developers just re-using all the same tools that we've known about for decades?

What's cool is that they've created an experience that's agnostic of the particular monetization strategy. Whereas Max needs to decide upfront which strategy to pursue, using virtual currency adds a layer of abstraction that allows users to self-select, based on how they value their time and money. Developers create up a pricing model for their experience, and then provide different ways for users to obtain the virtual currency - setting things up so that value to them is about the same no matter how the currency is obtained.

So what next? Should Max use virtual currency for his online service? I'll share some final thoughts in Part IV:Virtual Currency for Everyone?